Liquidity Bubble

Ray Dalio is one of the foremost economic thinkers and investors of this era.
His hedge fund empire now manages $130bn. He has taken on a higher public
profile of late, including notable interviews and speaking engagements this
week at Davos (43rd World Economic Forum Annual Meeting). In previous CBBs,
I highlighted Mr. Dalio's "beautiful deleveraging" thesis. His comments Thursday
and Friday from Davos raised some eyebrows - and are certainly worthy of analytical
focus.

From the January 24, 2013, CNBC TV interview:

CNBC's Andrew Ross-Sorkin: "When you talk about the economic machine, what
is that, exactly?"

Ray Dalio: "So everything is a transaction, right? Every good, service or
financial asset, somebody's buying, and they buy with money or they buy with
credit. And so you go in to a store and you buy a suit. You buy it with money
or you buy with credit. Credit is a promise to deliver money. You and I can
make up credit. If I say, listen, you can have the suit and you just pay me
back later, that will calculate as GDP or a sale, but yet there's no payment
made. So, as a result credit grows a lot faster than money, and credit grows
faster than income. And when credit grows faster than income - when debt grows
faster than income - that can't go on for long. At some point, you can't service
[the debt], because it's a promise to deliver money. When that money can't
-- you can't come up - you have a deleveraging. So what happened in 2007 was
they ran a bubble. We had credit growing much faster than money - money or
income. And we had that bubble, and so now we're going through an adjustment.
Let me explain that adjustment... So, in a deleveraging - and de-leveragings
have happened throughout time - it just didn't happen in our lifetime before.
But it happened in Japan; it happened in the '30s; happened in Latin America.
They happen all the time. How do they work? Too much debt relative to income.
So there are four things you can do - all of them are the same. You can either
transfer wealth from the haves to the have-nots. So Germany can help Spain.
You can do that or you can write down debts, because if there's too much debt
you have to reduce it. So you can write it down. But the problem with writing
it down - is one man's debt is another man's assets. So you write down assets,
and it feeds on itself and it has a problem. It causes pain. The third way
you can deal with it is that you can spend less. So, I'll borrow less: Austerity.
And we go through austerity. And the fourth way you can deal with it is you
can print money. So central banks can come and they can give money to Spaniards
who may not be able to pay the debt, and that helps them do that. So there
are always those four ways that happen. In all deleveraging they all happen.
So what we've gone through, the bubble was obvious, because it couldn't extend
-- you can't raise debt relative to income and the leveraging couldn't continue.
And the deleveraging that was taking place had to happen in those four ways.
It has largely happened..."

"The capacity of lenders to lend, to meet the borrowing requirements, has
largely been adjusted. So, Spain's borrowing has fallen. Italy's borrowing
has fallen. Those types of borrowings have collapsed. With that is, of course,
the collapse of their economies. That's what the depression is. You have to
spend less, because you have less ability to borrow. So that causes a collapse
in those economies. It was still, even with that, not enough money to service
the debt. So, I use Spain as an example because it's representative. If you
take Spain, but the ECB came in and put in $450 billion of money. They put
in about 350bn to the Spanish banks... That was the right thing to do. The
policy so far - there was a gap - an irreconcilable gap - an unbridgeable
funding gap. So now what we have is a situation where the borrowing needs
and the debt rollover needs and the borrowing are approximately in line, and
a cushion has been created. The ECB took over - filled the gap where normally
the free market does fill it, and that has now moved it along to a different
condition..."

"The way I look at it is first of all, there's economics of the cause effect
and so, this will be a long problem. Now I'll talk the economics and I'll
talk about the markets independently, but they're connected. The economics
means that there will be a long period of adjustment and what will happen
most importantly is productivity. Does Europe work hard, can they do the things
that are necessary to raise its living standards because it can't be on money.
And there will be a social challenge, social, political challenge of ten years
or so, maybe it's 15 years. Japan has made it go on for longer. The fundamental
thing that they need to do most is to make sure that the nominal interest
rate is at or below the nominal growth rate. I won't get technical, but otherwise
what you're going to have is the debt compounding at a rate which is faster
than the economy is growing. So, anyway, that picture - there was a tremendous
change, but it will be a terrible economy. Because the balance is, the preventing
of chaos, we came very close to having chaos right at the edge of it, because
there was not a backstop. We got past that point. So now as we move forward,
we can -- that can be managed, and it's going to be very difficult and very
painful, as far as the markets go: now, the question in the markets is, how
do events transpire relative to what's discounted..."

"Currently what we have is a lot of money is in cash. And cash is a bad thing
and it's not natural that it came to be cash because the central banks printed
a lot of money - so they put out a lot of cash. That's what Japan is doing,
too, because it needs to do that. So it produces a lot of cash within the
system. In addition, because you have the risks, people want to be safe. So
they put their money in cash - and there's a lot of cash hanging around...
It's a natural consequence, and what will happen is the next big moves in
the markets, and the next big moves in the economy, will be based on how the
cash moves. Because [cash] is a bad investment. It has a negative real return.
It has a return that's substantially lower than the economy's growth rate.
And at the same time, we're in a situation where risks are being reduced.
So the fear, the desire, to hold that cash is reduced. You can go out on the
risk spectrum, because they're reduced for the reasons we're talking about.
At the same time, if you're an investor, you can start to move out of the
cash, because you're missing out on returns... As that happens, I think 2013
is likely to be a transition year. Where that cash, large amounts of cash...
that will start to change. It will also move. It will move to stuff. It will
move to all sorts of stuff. It will move to goods, services and financial
assets. So, that will include most goods, services and financial assets. People
will spend more with the cash. They will -- and that will help the economy.
It will move into equities. It will move into gold. It will move... out onto
that curve. As that happens, what happens is, it makes the Federal Reserve's
concerns begin to change. Because, by putting the cash in they've lessened
the risks. As the risks have lessened and that movement starts to move then
the tilt starts to change. That's probably something that won't happen immediately.
This is like a classic transition year, I think. And then as you get later
into the year, I think that we're going to see more of that."

Clearly, Dalio has been operating with an exceptional analytical framework.
His success speaks for itself. He recognized the U.S. mortgage finance Bubble
and European Bubble fragilities. He and his team have understood how global
markets and economies would function throughout this extraordinary environment.
And Dalio has understood policymaker doctrine, policy responses and market
impacts.

As much as I respect Mr. Dalio's analytical framework, I'll continue to take
exception with the general thesis that the U.S. has been moving through a
successful "deleveraging" period. I have argued deleveraging is largely a
myth. I contend unprecedented policy measures have only made the grand scope
of a historic Bubble much more unwieldy. In Davos Friday, Mr. Dalio stated "we
don't have a credit bubble" but instead a "bubble in liquidity." This is critical
subject matter worthy of discussion.

I have noted that key facets of today's Global Credit Bubble are recognizable
to very few. Some would argue that a Bubble doesn't exist today because Credit
is not growing in excess of incomes and/or GDP. I have argued that the Bubble
has evolved to become deeply systemic, in particular by inflating incomes
and expenditures on a generalized basis. Hence, ratios of debt-to-income and
to output won't be particularly illuminating. Actually, most ratios have become
deceptive.

At the heart of today's Bubble is the confluence of ongoing massive issuance
of non-productive government debt and monetary policy-induced price distortions.
I have argued that this debt coupled with policymaker systemic backstops has
distorted incomes, spending, and asset prices throughout the U.S. and global
economy. And, importantly, this systemic reflation has sustained maladjusted
economic structures and global imbalances. In simple terms, it's a Bubble
primarily because of the ongoing massive issuance of mispriced Credit - an
unsustainable Credit inflation that fuels global market Bubbles and deep structural
economic impairment and imbalances. U.S. Credit growth could approach $2.0
TN this year. Global hedge fund assets will set new records.

At the end of the day, my Credit Bubble framework/thesis will be proven insightful
or otherwise on the issue of "economic structure." Fundamentally, contemporary
economies are structured differently than in the past, and this has added
layers of complexity to already challenging analysis. What counts these days
as economic output? In gross domestic product (GDP), a dollar of "services" counts
the same as a dollar of long-term capital investment. But when it comes to
Credit, if I'm a lender I'd much rather lend to someone investing in long-term
wealth creating capacity than someone borrowing to buy season tickets to the
Philadelphia Eagles. From an economy standpoint, would you rather lend to
Germany or Spain?

Eventually, Credit system robustness or fragility will be determined not by
monetary and fiscal policy (or the "reserve" status of one's currency) but
by the wherewithal of the real economy. For years, chairman Greenspan trumpeted
the U.S. "productivity miracle" and the incredible efficiency by which our
limited amount of "capital" was invested. And each year our nation's "New
Paradigm" economy consumed more than it produced, ran up huge debts, played
games with risk intermediation, and watched asset prices inflate and the Credit
Bubble grow to dangerous extremes.

From Mr. Dalio: "The fundamental thing that [policymakers] need to do most
is to make sure that the nominal interest rate is at or below the nominal
growth rate." Well, I would argue that such a policy regime may help - or
it might actually make things a whole lot worse. What are the consequences
of extreme policy measures? What is being incentivized - in the markets and
throughout the real economy?

More specifically, are artificially low rates assisting in real economy restructuring
through the financing of sound investment? Are they promoting the overall
reduction in system debt - or accommodating further profligate borrowing and
spending? Is the policy and market backdrop incentivizing a more favorable
mix of investment versus consumption? Production vs. services? Is the manipulated
cost of finance spurring greater distortions in market pricing mechanisms
and further economic malinvestment?

Is the policy backdrop supporting a more robust Credit system, with financial
claims increasingly backed by real economic wealth creating capacity? Or is
government sector dominance only fostering greater quantities of non-productive
debt and myriad distortions and imbalances? Does virtual government control
over the pricing of finance have, on balance, positive or negative ramifications?
Are underlying risks being effectively recognized and priced in the marketplace
- or are risk perceptions dictated by government liquidity and market backstops?
Are the securities markets promoting an effective allocation of resources
or are the markets more akin to a "whirlwind of speculation?"

Well, these are no doubt incredibly complex and difficult concepts to contemplate
- let alone gauge. Different viewpoints, frameworks, analytical perspectives
and ideologies will come to radically different - often directly opposing
and irreconcilable - conclusions. That is the unsettled world in which we
live. But keep in mind that we're at the stage of the cycle where those that
have most adroitly profited from policymaking now control Trillions of assets
- while enjoying a commensurate impact on how the financial media view the
world.

Mr. Dalio believes we're at some risk of a "liquidity bubble." "Money" seems
to play an important role in his analytical framework. But Dalio, like many
of us, ponders the question "what is money?" The role of "money" is fundamental
to my analytical framework and Bubble thesis.

Contemporary "money" and Credit is essentially electronic-based. Outside of
currency, what we think of as "money," Credit and "finance" are electronic
debit and Credit entries in a complex global accounting system. It's essentially
a comprehensive system of liabilities and corresponding assets - one person's
IOU is another's financial asset; one institution's...; one government's...;
and so on.

"Money" is special - always has been. It's "precious." But, importantly, contemporary
money is made precious in a much different manner than was the case historically.
Money traditionally enjoyed preciousness because it was "backed" - it was
a claim supported by either gold, precious metals or other forms of tangible
economic wealth. Trust in money was maintained only when it was issued in
limited quantities. Importantly, money is dangerous specifically because of
its preciousness - faith that it won't be over-issued and conspicuously debased.
To a point, demand for money is almost insatiable. And too many times throughout
history the government printing press has been seen as a political expedient.

There is today seemingly little that differentiates "money" from Credit. They're
all just electronic entries. Contemporary "money" is Credit - but it's special
Credit. It's special because of the perception that it's a safe and liquid
store of nominal purchasing power. It's precious these days specifically because
of the perception that policymakers - especially central bankers - will ensure
that it maintains its essentially "risk free" attributes. It has indeed enjoyed
insatiable demand - and this has allowed Trillions of "money" to be issued
in the post-2008 crisis environment. And this "money" inflation has been absolutely
instrumental in sustaining the global Credit expansion - in the process reflating
markets, economies and animal spirits. It has again proved its value as an "expedient."

Dalio is calling 2013 a "transition year" and a "game changer." I'm sticking
with my "Bubble Year." From Dalio: "There's a lot of money in a place that's
getting a very bad return and in this particular year there's going to be,
in my opinion, a shift. The complexion of the world will change as that money
goes from cash into other things. The landscape will change particularly later
in the year and beyond."

I'm ok with "liquidity Bubble" terminology - and I'd be ok with "money Bubble." The
key to the analysis is to recognize it remains an unprecedented monetary Bubble
- an integral facet to sustaining a global Credit Bubble. I agree with Dalio
that a flight out of this "money" holds the potential for an extraordinary
2013. I wish I could be as sanguine. I worry about what this "money" might
do. But my greater fear is that global policymakers have impaired the creditworthiness
of "money" - the foundation of global finance. They fell for the same monetary
inflation trap that has cursed humanity throughout history.

Unprecedented "money printing" has continued for too many years. The debits
and Credit add to the Trillions. Along the way, the Fed has tried to assure
that they do indeed have an exit strategy. I have all along the way argued
there would be No Exit. The Fed has theorized how they would withdraw liquidity
before it could fuel higher inflation. From a global Bubble perspective, I've
seen the greater risks in asset inflation and rejuvenated market Bubbles.

The Fed and global central bankers have essentially been in the business of
creating Trillions of market-based liquidity. When they're content to sit
patiently in "cash" accounts, all these debits and Credits are seductively
benign. Inevitably, however, they're also a tinderbox. After all, it is the
nature of return-seeking market-based liquidity to chase the inflating asset
market ("liquidity loves inflation"). And if enormous amounts of trend-following
and performance-chasing "money" flow into already speculative and increasingly
dislocated financial markets, well, some will rejoice a new secular bull market.

The Fed, of course, would never admit it has fomented another major Bubble.
They will, once again, see inflating asset prices as confirmation of the success
of their policymaking regime. The (highly unstable) rate of market price inflation
will continue to play a backseat to the (relatively stable) high rate of unemployment.
But you'd think they'd begin questioning the necessity of their $85bn monthly "money
printing" in an environment where it is increasingly obvious that there's
way too many Trillions of "money" looking to chase too few global risk assets.

The Fed would be well served to go immediately back its drawing board and
try to figure out how to stop all this liquidity from turning inflated and
highly speculative global risk markets into an out of control mania. I'm not
holding my breath.

Global central bank "international reserve assets" (excluding gold) - as tallied
by Bloomberg - were up $743bn y-o-y, or 7.3%, to $10.929 TN. Over two years,
reserves were $1.682 TN higher, for 18% growth.

Total Commercial Paper outstanding declined $7.3bn to $1.126 TN CP was up
a notable $162bn in 11 weeks and $154bn, or 15.9%, over the past year.

Currency Watch:

January 24 - Bloomberg (Andy Sharp and Takashi Hirokawa): "Japan's deputy
economy minister said that a yen at 100 to the dollar wouldn't be a problem,
indicating global criticism may fail to convince Prime Minister Shinzo Abe
to temper his push to weaken the currency. 'The current level around 90 can
be said to be a correction of the strong yen, but it isn't over yet,' Yasutoshi
Nishimura said... He said a level of 110 to 120 would raise import costs,
echoing the view of Abe's adviser Koichi Hamada and suggesting that the government
won't back a currency free-fall."

The U.S. dollar index declined 0.4% to 79.75 (unchanged y-t-d). For the week
on the upside, the Norwegian krone increased 1.4%, the Danish krone 1.1%,
the euro1.1%, the Swedish krona 0.9%, the Swiss franc 0.8%, the Brazilian
real 0.6% and the New Zealand dollar 0.1%. For the week on the downside, the
South Korean won declined 1.6%, the Canadian dollar 1.4%, the Japanese yen
0.9%, the Australian dollar 0.8%, the South African rand 0.7%, the Taiwanese
dollar 0.7%, the Singapore dollar 0.6%, the British pound 0.5%, and the Mexican
peso 0.4%.

January 23 - Washington Post (Lori Montgomery and Rosalind S. Helderman): "A
plan to suspend the federal debt limit cleared a key hurdle in the House...,
easing the threat of a government default for at least four months. But congressional
leaders were already looking toward the next crisis: deep automatic spending
cuts that look increasingly likely to hit the Pentagon and other federal agencies
on March 1. Leaders in both parties predicted Wednesday that the cuts, known
as sequestration, will take effect at least briefly while policymakers try
to restart talks over a far-reaching plan to lower the national debt. 'It's
going to happen,' said Sen. Richard J. Durbin (Ill.), the No. 2 Democrat in
the Senate, noting that Republicans in both chambers are determined to let
the cuts take effect, saving $1.2 trillion over the next decade."

Global Bubble Watch:

January 25 - Bloomberg (Joshua Zumbrun and Jeff Kearns): "Federal Reserve
Chairman Ben S. Bernanke's unprecedented bond buying pushed the Fed's balance
sheet to a record $3 trillion as he shows no sign of softening his effort
to bring down 7.8% unemployment. The Fed is purchasing $85 billion of securities
every month, using the full force of its balance sheet to stoke the economic
recovery. The central bank began $40 billion in monthly purchases of mortgage-backed
securities in September and added $45 billion in Treasury securities to that
pace this month."

January 22 - Bloomberg (Rich Miller and Simon Kennedy): "International investors
are the most bullish on stocks in at least 3 1/2 years, with close to two-thirds
planning to raise their holdings of equities during the next six months, according
to a Bloomberg survey. As the global financial and business elite gather in
Davos for their annual forum, 53% of respondents to the Bloomberg Global Poll
also say equities will offer the highest return in the next year. That's a
17 percentage point jump from the last poll in November and the most since
the quarterly survey of investors, analysts and traders who subscribe to Bloomberg
began in July 2009."

January 23 - Bloomberg (Sandrine Rastello): "The International Monetary Fund
cut its global growth forecasts and now projects a second year of contraction
in the euro region... The world economy will expand 3.5% this year, less than
the 3.6% forecast in October... It expects the 17-country euro area to shrink
0.2% in 2013, instead of growing 0.2% as forecast in October, as Spain leads
the contraction and Germany slows. 'Is Europe on the mend? I think the answer
is yes and no,' IMF Chief Economist Olivier Blanchard said... 'Something has
to happen to start growth.'"

January 24 - Bloomberg (Lisa Abramowicz): "Exchange-traded funds, which have
amassed $33.3 billion in junk bonds, are contributing to distortions in prices
and yields as concern rises that speculative-grade debt is poised for a reversal
of fortune. Yields over benchmarks for the debt owned by ETFs are 2.03 percentage
points less than those they don't hold, the widest gap on record after reaching
0.14 percentage point in May, according to Bank of America Corp. Spreads on
Sprint Nextel Corp.'s 6% notes, part of BlackRock Inc.'s $16.2 billion ETF,
are 61 bps narrower than the wireless carrier's securities not held by the
fund that mature the same year. ETFs that received $5.6 billion of deposits
since May are adding to a flood of money seeking extra yield as the Federal
Reserve has suppressed borrowing costs with interest rates at about zero since
2008."

January 25 - Bloomberg (Tanya Angerer): "Chinese corporate dollar-denominated
bond sales are off to a record start as an accelerating economy allays default
concerns, driving down borrowing costs by the most in Asia. Yuexiu Property
Co., whose projects include the Guangzhou International Finance Center, led
$5.35 billion of offerings since Dec. 31..."

Global Credit Watch:

January 25 - Bloomberg (Stefan Riecher): "The European Central Bank said banks
will next week repay more of its emergency three-year loans than economists
forecast in another sign the euro region's debt crisis is abating. Some 278
financial institutions will return 137.2 billion euros ($184.4bn) on Jan.
30, the first opportunity for early repayment of the initial three-year loan...
The ECB's first loan totalled 489 billion euros and banks can continue to
make early repayments in coming weeks."

January 24 - Bloomberg (John Glover): "Lenders repaying cash borrowed from the
European Central Bank via its Longer-Term Refinancing Operations are poised to
underline the north-south divide that characterizes the euro region. Banks can
start paying back this week more than 1 trillion euros ($1.33 trillion) of three-year
money they borrowed in two portions during 2012. Only banks able to raise funds
at less than the 75 bps the ECB charges are likely to repay, and they will probably
be from northern Europe, said Richard McGuire, a strategist at Rabobank International
in London."

China Bubble Watch:

January 24 - Bloomberg: "China's manufacturing is expanding at the fastest
rate in two years... bolstering prospects that economic growth will accelerate
for a second straight quarter. The preliminary reading of a Purchasing Managers'
Index was 51.9 in January, according to... HSBC... and Markit Economics...
That compares with the 51.5 final reading for December... The data suggest
that China's expansion at the start of 2013 will equal or exceed its 7.9%
clip in the fourth quarter."

January 25 - Dow Jones (Aaron Back): "China has seen an increase in capital
inflows since September, but it is difficult to determine to what extent this
reflects speculative 'hot money,' the country's foreign exchange regulator
said... Chinese banks bought a net $86.9 billion of foreign exchange from
clients in the September-December period... The figures indicate bank clients'
eagerness to swap into the local currency accelerated toward the end of last
year."

January 23 - Bloomberg: "China's economic risks have shifted back to growing
too quickly as new regional-government officials try to boost development,
a former central bank adviser said. 'The new problem is how to prevent overheating,'
which would stoke inflation and asset bubbles while pushing the government
to enact controls, Fan Gang, a People's Bank of China academic adviser from
2006 to 2010, said today in... Davos, Switzerland... 'That kind of complication
has come back again.' Fan's comments mark a resurfacing of concerns that had
receded last year as growth, inflation and the housing market cooled. The
world's second-largest economy may expand by 8% to 8.5% this year, Fan said,
following the weakest pace since 1999."

January 23 - Bloomberg (David Yong): "China's plan to allow a 50% jump in
its budget deficit to stimulate the economy is driving government bond yields
higher, just as inflation accelerates. Ten-year yields may rise 43 bps to
4% by year-end, a level last seen in September 2011, according to HSBC...,
Deutsche Bank AG and Standard Chartered Plc... HSBC estimates the government
will expand its domestic bond sales by an extra 400 billion yuan ($64.3bn)
this year to plug a 1.2 trillion yuan deficit, the biggest shortfall since
the 2008 global financial crisis."

Japan Bubble Watch:

January 23 - Bloomberg (Toru Fujioka and Isabel Reynolds): "The Bank of Japan's
decision to hold off on fresh monetary stimulus for a year puts pressure on
the Abe administration to revive growth through fiscal measures and risks
capping losses in the yen that aid export competitiveness. Governor Masaaki
Shirakawa, whose term ends in less than 11 weeks, yesterday agreed to set
the 2% inflation target urged by Prime Minister Shinzo Abe, while stopping
short of immediate action to achieve it. The BOJ plans to start open-ended
asset purchases in January next year."

January 23 - Financial Times (Jonathan Soble ): "Japan's trade deficit nearly
tripled in 2012 to Y6.93tn ($77bn), an unprecedented shortfall for the traditional
export powerhouse as it faces criticism that it is weakening the yen to favour
Toyota and other Japanese manufacturers. The sharp expansion of the deficit,
from Y2.56tn in 2011, in part reflected falling sales of Japanese goods abroad,
a problem that has been traced to a strong yen, the weak economy in Europe
and anti-Japanese boycotts by consumers in China. It was only the third year
since 1980 that export sales failed to cover the cost of imports... Exports
to China... fell 15.8%... The growth in imports has complicated the calculations
surrounding efforts to shrink the trade deficit. A weaker yen makes imports
more expensive, and will help only if it spurs a much greater increase in
foreigners' appetite for exports."

Latin America Watch:

January 24 - Bloomberg (Matthew Malinowski and Raymond Colitt): "Brazil's
central bank said additional monetary policy stimulus will fail to boost economic
growth that is recovering more slowly than expected due to limited supply.
Policy makers... reiterated that the best policy for bringing consumer price
increases to the 4.5% target is to keep rates at a record low for a 'sufficiently
prolonged period.'"

U.S. Bubble Economy Watch:

January 24 - CNBC (Robert Frank): "The Hamptons real-estate market has not
only recovered. It's soaring past its pre-crisis peaks. Sales of homes priced
at $2.5 million or more jumped 98% in the fourth quarter on Long Island's
East End, according to the luxury realty agency Brown Harris Stevens. Prices
in some Hamptons communities have doubled, with the average home price passing
$2.1 million in the South Fork. More than 90 homes sold for more than $2.5
million in the Hamptons East End in the quarter. 'A lot of the deals and bargains
are gone,' said Christopher Burnside, senior director of Brown Harris in the
Hamptons. 'It's been very sudden.'"

January 22 - Bloomberg (Alex Kowalski): "Sales of U.S. existing homes unexpectedly
dropped in December, restrained by the lowest supply of properties in more
than a decade. Purchases fell 1% to a 4.94 million annual rate last month...
The reading was still the second-highest since November 2009... Even with
December's slip, 4.65 million homes were purchased for all of 2012, the most
since 2007 and a sign the housing market is making steps toward recovery...
Sales last year climbed 9.2% from 4.26 million in 2011. The median price of
an existing home rose 11.5% to $180,800 from $162,200 in December 2011...
The number of previously owned homes on the market dropped to 1.82 million,
the fewest since January 2001... At the current sales pace, it would take
4.4 months to sell those houses, the lowest since May 2005..."

January 23 - Bloomberg (Prashant Gopal): "U.S. home prices climbed 5.6% in
the 12 months through November as buyers competed for a dwindling inventory
of properties, according to the Federal Housing Finance Agency. Prices rose
0.6% from October on a seasonally adjusted basis..."

Federal Reserve Watch:

January 24 - Bloomberg (Caroline Salas Gage and Steve Matthews): "Federal
Reserve Chairman Ben S. Bernanke and his fellow policy makers will probably
forge ahead with their unprecedented bond buying when they meet next week,
even as they pick up a debate that began in December on when to end the purchases.
The job market has yet to show the 'substantial' gains Bernanke said he wants
to see before halting asset purchases. Unemployment has persisted at 7.8%
or higher since January 2009 while Bernanke held the main interest rate near
zero and expanded the Fed's assets to a record $2.97 trillion. Meanwhile,
all 19 Federal Open Market Committee participants see no immediate threat
from inflation, now at 1.4%. The Fed chairman can count on the FOMC to endorse
the current program to buy $45 billion in Treasury notes and $40 billion in
mortgage bonds each month, said Nathan Sheets, Bernanke's top adviser on international
economics from 2007 to 2011."

Europe Watch:

January 25 - Bloomberg (Scott Hamilton): "Britain's economy shrank more than
forecast in the fourth quarter as the boost from the Olympic Games unwound
and oil and gas output plunged, leaving the country on the brink of an unprecedented
triple-dip recession. Gross domestic product dropped 0.3% from the three months
through September, when it grew 0.9%..."

Germany Watch:

January 22 - Bloomberg (Jeff Black): "Bundesbank President Jens Weidmann said
the Bank of Japan's independence is under threat and warned that government
interference in monetary policy could start to impact on exchange rates. 'Already,
alarming attacks can be seen, for example in Hungary or in Japan, where the
new government is interfering massively in the affairs of the central bank,
pressuring for a yet more aggressive monetary policy that's threatening the
end of central bank autonomy,' Weidmann... said in a speech... 'A consequence,
whether intended or not, could be the increasing politicization of the exchange
rate... 'Until now, the international monetary system has come through the
crisis without rounds of competitive devaluations... I very much hope it stays
that way.'"

January 24 - Bloomberg (Tony Czuczka and Rainer Buergin): "German Chancellor
Angela Merkel said the Japanese government's call for monetary easing and
central- bank cash that's been unleashed to stem Europe's debt crisis constitute
risks to the global economic recovery. 'I can't say I'm completely free of
worry when I look at Japan right now,' Merkel said... For Europe, the 'large
amount of liquidity' pumped into the financial system last year, particularly
to help banks, has to be mopped up again,' she said."

January 24 - Bloomberg (Simon Kennedy): "The central bankers who saved the
world economy are now being told they risk hurting it. Even as the International
Monetary Fund cuts its global growth outlook, a flood of stimulus is running
into criticism at the World Economic Forum's annual meeting in Davos. Among
the concerns: so-called quantitative easing is fanning complacency among governments
and households, fueling the risk of a race to devalue currencies and leading
to asset bubbles. 'Central banks can buy time, but they cannot fix issues
long-term,' former Bundesbank President Axel Weber... There's a perception
that they are the only game in town.' The warnings, louder this year than
last, come as U.S. stocks hit the highest since late 2007, London house prices
jump and junk bond yields fell below 6% for the first time. The challenge
for policy makers in Davos and beyond is to decide whether it's time to act
on those moves now or to keep pushing measures to shore up a still-ailing
global economy."

January 22 - Dow Jones: "Cyprus' financial challenges could destabilize the
entire euro zone, a top central banker from the European Central Bank said...
'Disorderly developments in Cyprus could undermine progress made in 2012 in
stabilizing the euro area,' Joerg Asmussen, an executive board member with
the ECB, told Reuters... 'Cyprus could well be systemic for the rest of the
euro area despite its size,' he added. Mr. Asmussen's warning comes just one
day after German Finance Minister Wolfgang Schaeuble questioned whether Cyprus
represents a danger to the monetary union."

January 22 - Bloomberg (Stefan Riecher): "Germany's Bundesbank said it's concerned
that a false rumor about its president resigning may have been spread to manipulate
the market. 'We can't rule out that the market has been manipulated on purpose,'
a spokesman for the... Bundesbank said... The rumor that president Jens Weidmann
had resigned was totally false, he said."

Spain Watch:

January 23 - Bloomberg (Angeline Benoit and Charles Penty): "Spain's recession
deepened in the last quarter of 2012 after Prime Minister Mariano Rajoy's
government approved its fifth austerity package in a year to reduce the second-largest
budget deficit in the euro area. Gross domestic product shrank for a sixth
quarter, contracting 0.6% from the previous three months, when it slipped
0.3%... Output may have contracted 1.3% in 2012 as budget cuts weighed on
economic activity, the... Bank of Spain said. While it's not yet clear if
Spain will meet its 2012 deficit target set by the European Union, satisfying
this year's goal 'will require a very ambitious additional fiscal effort from
the central government and the regions,' it said."

January 24 - Bloomberg (Angeline Benoit): "Spanish unemployment rose to a
record in the final quarter of 2012... The number of jobless approached 6
million people, or 26.02%, from 25.01% in the previous three months... It
is now the highest since at least 1976, the year after dictator Francisco
Franco's death heralded Spain's transition to democracy."

January 23 - Bloomberg (Andrea Gerlin and Alex Morales): "Carlos Hernandez
Sonseca studied six years for a bachelor's degree and couldn't find a job
near his home outside Madrid when he graduated in 2011. Last year, he took
an increasingly well-worn path to the U.K. The 27-year-old journalist now
washes and chops vegetables eight hours a day at the Vital Ingredient salad
bar in London's financial district, making 260 pounds ($418) before taxes
in a 40-hour week. Thirteen other Spaniards are among a workforce of 17...
U.K. fast-food jobs and other low-wage roles have been dominated by Poles
and others who arrived after the European Union expanded eastward in 2004.
Now they're joined by young Spaniards who can't find work at home... 'We are
a lost generation, for sure,' Hernandez Sonseca said. 'Spain has nothing to
offer us, so we go abroad and we work as salad makers and kitchen porters.
They are losing money and they are losing skilled people.'"

Italy Watch:

January 23 - Bloomberg (Sonia Sirletti and Elisa Martinuzzi): "Banca Monte
dei Paschi di Siena SpA, the Italian bank seeking a second state bailout in
four years, hid documents from regulators on financial transactions that may
prompt the lender to restate profit. 'The nature of some transactions involving
Monte dei Paschi di Siena reported by the press has been disclosed only recently
after hidden documents were found by new executives,' the Bank of Italy said...
'The transactions are now being reviewed by the central bank's oversight division
as well as judicial authorities.' Monte Paschi said on Jan. 17 it will review
its accounts after Bloomberg News reported the lender engaged in a derivative
with Deutsche Bank AG in 2008, dubbed 'Project Santorini,' that obscured losses
before it sought a government bailout the next year."

January 25 - Bloomberg (Andrew Davis and Sonia Sirletti): "Banca Monte dei
Paschi di Siena SpA's 3.9 billion-euro ($5.2bn) government bailout may face
a delay after Prime Minister Mario Monti called for a further review of the
bank's accounts. Monti said the Bank of Italy will take another look at the
bank's books after the company disclosed this week it may face more than 700
million euros of losses related to structured finance transactions hidden
from regulators. Monte Paschi shareholders are voting on a capital increase
today to pave the way for the emergency government loans."

January 24 - Financial Times (Rachel Sanderson): "Mario Monti, Italy's prime
minister, was forced to offer to recall parliament yesterday amid questions
about his government's handling of the financial crisis at Monte dei Paschi
di Siena and the role of the central bank. Shares in Italy's third largest
bank by assets, which has requested a second state bailout in four years,
have fallen more than 22% in the past few days since revelations five days
ago of derivatives transactions that may force the 500-year-old bank to restate
hundreds of millions of euros of losses. Supervision of the struggling institution
by the Bank of Italy, while Mario Draghi, European Central Bank president,
was governor has come under attack as an increasingly fierce political outcry
erupts in the run up to national elections next month."